OTC Derivatives and Counterparty Credit Risk Mitigation: The OIS Discounting Framework

Paola Leone, Massimo Proietti, Pasqualina Porretta and Gianfranco A. Vento
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Paola Leone: Sapienza University of Rome
Massimo Proietti: Sapienza University of Rome
Gianfranco A. Vento: Guglielmo Marconi University in Rome

Chapter 4 in Liquidity Risk, Efficiency and New Bank Business Models, 2016, pp 57-91 from Palgrave Macmillan

Abstract: Abstract In recent years, a complex regulatory framework has been developed, aimed at improving the functioning of the OTC derivatives market, reducing counterparty risk and enhancing transparency and mitigation for investors. We refer, in particular, to regulation of the financial markets (European Market Infrastructure Regulation), prudential supervision (Basel II and III) and the IFRS 13 Fair Value Measurement accounting regulations. These regulatory frameworks impact on financial intermediaries at organisational, procedural, measurement and collateralisation levels and, as will be seen throughout this chapter, on their pricing frameworks (or, better, on how cash flows should be discounted to define the mark to market of the financial asset). This chapter thus focuses on: (1) the regulatory framework related to counterparty risk (EMIR framework, Basel III, IAS/IFRS); and (2) methodologies to move from Libor/Euribor to OIS discounting in derivatives pricing.

Keywords: Cash Flow; Credit Risk; Forward Rate; Counterparty Risk; Interest Rate Swap (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:pal:pmschp:978-3-319-30819-7_4

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DOI: 10.1007/978-3-319-30819-7_4

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